Kate Mackeson

an economy's production of two goods is efficient if

The points inside the production possibility curve (ppc) are points that indicate inefficient use of the available resouces.and the production technology. Therefore, Pareto Efficiency indicates that resources can no longer be allocated in a way that makes one party better off without harming othe… A Model of a Two-Factor … In this economy: • Labor is the only factor of production. it is impossible to produce more of one good without producing less of the other. For companies that offer goods for sale, production costs are a major factor in pricing and overall performance. All other points on the production possibility line are possible combinations of the two goods that can be produced given current resources. all members of society consume equal portions of the goods. •Production of food is land-intensiveand production of cloth is labor-intensivein both countries. Absolute advantage occurs when a country or region can create more of a product with the same factor inputs. When indifference curves are smooth and convex, if two indifference curves are tangent at a point in an Edgeworth box, then that point: Suppose the total endowments of two goods are 10 and 50. b. the goods are produced using only some of society's available resources. If workers can concentrate on one small aspect of production, this increases overall efficiency – so long as there are sufficient volume and quantity produced. An economy (from Greek οίκος – "household" and νέμoμαι – "manage") is an area of the production, distribution and trade, as well as consumption of goods and services by different agents. Instead, there is some production technology in the economy, and some endowment of inputs to production (such as labour and machinery), which determines which combinations of the two goods can be produced. the goods are produced using only some of society’s available resources. In other words, the raw materials undergo value addition. A)a point with maximum and efficient production of Goods A and Goods B. From the optimal choices inside the Edgeworth box, we derive a production possibilities frontier that describes all the efficient combinations of two goods to maximize the benefit of both consumers. could be, The shift of the production possibilities frontier from A to B can best, The movement from point M to point K could be caused by, The opportunity cost of moving from point K to point L is. Productive efficiency occurs when the optimal combination of inputs results in the maximum amount of output at minimal costs. Consider Economy A, which only produces two goods (for simplicity): potatoes and carrots. An outward shift of a PPF means that an economy has increased its capacity to produce. 12. at point A, B or C) it is not possible to increase output of goods without reducing output of services. • Only two goods (say wine and cheese) are produced. Increasing production and lowering costs results in economies of scale because the costs are spread out over a larger number of goods. The production possibilities curve is also called the PPF or the production possibilities frontier. An economy's production of two goods is efficient if: a. all members of society consume equal portions of the goods. The box diagram Figure 1 explains the optimum condition of exchange. Production Possibility Frontier. The efficient production of public goods follows the same criterion as private goods -- equality between the value of the good produced and the value of goods not produced (opportunity cost). •An economy can produce two goods, cloth and food. A productively efficient economy always produces on its production possibility frontier. Using a production Edgewrth box , shows that efficiency in production has similar properties to efficiency in distribution. Suppose an economy produces two goods, food and machines. production of 1 donut and 4 cups of coffee becomes efficient, the tradeoff between the production of donuts and coffee changes, the opportunity cost of a cup of coffee is higher at all levels of coffee production, production of 4 donuts and 2 cups of coffee becomes possible. You are forced to make a decision on how to allocate the scarce reso… A market economy is a system where the laws of supply and those of demand direct the production of goods and services. b. all members of society consume equal portions of the goods. To rep- •The production of these goods requires two inputs that are in limited supply; labor (L) and land (T). (ii) In What Quantity Goods are to be Produced: Once, we understand that the production of both consumer goods and capital goods … An increase in an economy’s productive potential can be shown by an outward shift in the economy’s production possibility frontier (PPF). possible at points J, K, L, and M, but efficient only at points J, L, and M. possible at points J, K, L, and M, but efficient only at point K. possible at points J, L, M, and N, but efficient only at points J, L, and M. Production is the process where the raw materials are utilized to form usable products. But Country A has a comparative advantage in the production of good X. Whether we For a limited time, find answers and explanations to over 1.2 million textbook exercises for FREE! D) amount of labor needed to produce the goods and services. This particular production possibilities curve illustrates the alternative combinations of two goods--crab puffs and storage sheds--that can be produced by the economy. (b) With 40 workers, Mexico can produce a maximum of 8,000 shoes and zero refrigerators, or 10,000 refrigerators and zero shoes. all members of society consume equal portions of the goods. d. the opportunity cost of producing more of one good is zero. C) If there are only two goods,guns and butter,it is possible to produce more of both goods if the economy is currently operating at a productive efficient point. Suppose there are two consumers A and В who buy two goods X and Y, and each faces the price ratio P x /P y … Thus A will choose X and Y such that his A MRS xv = X x /P y.Similarly В will choose X and Y such that his MRS XY =P x /P y.Therefore, the condition for efficiency in exchange is A MRS xv = B MRS xv –P x /P y.. In the context of the production possibilities frontier,opportunity cost can be measured by the: A) ratio of the amounts of the two goods being produced. •Perfect competition prevails in all markets. In business analysis, the production possibility frontier (PPF) is a curve illustrating the varying amounts of two products that can be produced when both … Pareto efficiency or optimality is another way to measure efficiency. B) would be a desirable combination of outputs only if there was no international trade. If an economy experiences increasing opportunity costs with respect to two goods, then the production- possibilities curve between the two goods will be: A) Bowed outward. Refer to Figure 2-8, Panel (a) and Panel (b). But instead of two pure private goods Xand Y, now we have one pure private good X, and one pure public good Z. D)a combination of goods and services that cannot be produced efficiently. the opportunity cost of producing more of one good is zero. Similarly, there are two kinds of actors, producers and consumers. B) slope of the frontier. Course Hero is not sponsored or endorsed by any college or university. 33)If production of two goods is currently at levels such that we are inside the production possibilities frontier A)in order to produce more of one good, we must produce less of the other. Get the detailed answer: When is the economy's production of two goods efficient? B) Bowed inward. If an economy produces two kinds of goods, it stands to reason that some of its productive resources will be more efficient at making one kind of good and some will be better at making the other. An economy's production of two goods is efficient if Answers: a. the goods are produced using only some of society's available resources. Move us to a point above the production possibilities curve. b. the goods are produced using only some of society's available resources. In business analysis, the production possibility frontier (PPF) is a curve illustrating the varying amounts of two products that can be produced when both depend on the same finite resources. Why Society Must Choose. As above, the economy still is a two{person, two{good world. - The ratio of consumer goods to capital goods is how the production possibilities frontier shifts. Get step-by-step explanations, verified by experts. If one person is consuming 10 units of It is 9/10ths as efficient at producing good X but it is only 3/5ths as efficient at producing good Y. Get the detailed answer: When is the economy's production of two goods efficient? An economic system, or economic order, is a system of production, resource allocation and distribution of goods and services within a society or a given geographic area. The production possibilities frontier (PPF) demonstrates the trade-off that countries exhibit when choosing what to produce. Sciences, Culinary Arts and Personal Which of the following combinations of shift of the economy’s production possibilities frontier from Panel (a) to Panel (b)? The efficient production of goods occurs when it becomes impossible for a country to produce good A without producing fewer units of good B. A Production Possibility Frontier (PPF) is the graphical representation of Figure 2.2a. If there are only two goods, guns and butter, it is possible to produce more of both goods if the economy is currently operating at a productive efficient point. Last year, it produced fifty … Well-being is made possible by efficient production and by the interaction between producers and consumers. Demand includes purchases by consumers, businesses, and the government. Supply includes natural resources , capital, and labor. Our experts can answer your tough homework and study questions. C) is attainable but involves the unemployment and inefficient use of some of society's resources. {/eq}. A key point to understand is the idea that economic efficiency occurs "when the cost of producing a given output is as low as possible". True or false? An economy’s production of two goods is efficient ifa. For example, if someone developed a faster computer, or a more efficient way of manufacturing cars, we might see a shift to the right in the PPF. One of these theories is the absolute advantage theory. However, a key difference between the two rests with identifying the value of the good produced. When the marginal rate of technical substitution is equal for both goods, it means that all available inputs are being used, which translates into a purely efficient production process. This economy always operates on its production possibilities frontier. In other words, you face a trade-off: any time you spend harvesting pineapples is time that cannot be spent looking for crabs. getting all it can get from the scarce resources it has available. b. the goods are produced using only some of society’s available resources. where marginal costs equal average costs). C) bowed Production of capital goods is essential for future growth. All choices along the curve shows production efficiency of both goods. B) the prices of both goods are identical. c. it is impossible to produce more d. 95. Given the economy’s factors of production and technology, the economy can produce various combinations of the two goods. Pareto Improvement: A resource allocation is Pareto improved if there exists another allocation in which one person is better off, and no person is worse off. An economic model is only useful when we understand its underlying assumptions. An economy’s production of two goods is efficient if: all members of society consume equal portions of the goods. It includes the combination of the various institutions, agencies, entities, decision-making processes and patterns of consumption that comprise the economic structure of a given community. If an economy faces increasing opportunity costs with respect to the production of two goods,then the production possibilities frontier between the two goods will be: A) bowed inward. An efficient production of products is essential since it ensures that all the resources of a country are optimally utilized. d. the opportunity cost of producing more of one good is zero. Developed by Vilfredo Pareto, (1848 – 1923) Pareto efficient allocation of goods occur when no other possible allocation […] In the first case, a society may discover that it has been using its resources inefficiently, in which case by improving efficiency As a source of economic well-being In principle there are two main activities in an economy, production and consumption. Pareto Efficiency: A resource allocation is Pareto efficient if no Pareto improvement is possible. it is impossible to produce more of one good without producing less of the other. Using the Production Possibility Curve to Illustrate Economic Conditions, Applying the Production Possibilities Model, Marginal Opportunity Cost: Definition & Formula, Shifts in the Production Possibilities Curve, Economic Scarcity and the Function of Choice, Voluntary Exchange: Definition, Principle, Model & Examples, Factors of Production in Economics: Definition, Importance & Examples, Total Product, Average Product & Marginal Product in Economics, Minimum Wage and its Effects on Employment, Utility Theory: Definition, Examples & Economics, What is the Law of Demand in Economics? (1)If production in the economy is efficient, then changes in market prices Move us along the perimeter of the production possibilities curve. An increase in an economy’s productive potential can be shown by an outward shift in the economy’s production possibility frontier (PPF). c. it is impossible to produce more of one good without producing less of the other. c. it is impossible to produce more of one good without producing less of the other. An economy can produce either of these two combinations of goods X and Y: 1,000X and 0Y or 400Y and 0X. The simplest way to show economic growth is to bundle all goods into two basic categories, consumer and capital goods. Answer to An economy’s production of two goods is efficient ifa. However, at Point D (16 goods and 17 services) It is possible to increase either without leading to a decline in the output of the other. B) a straight downward-sloped curve. All rights reserved. While much useful analysis can be conducted with a chart, it is often useful to represent our models graphically. possibilities frontier from Panel (a) to Panel (b) could be caused by, The opportunity cost of one cup of coffee is highest when. 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Production efficiency is an economic term describing a level in which an economy or entity can no longer produce additional amounts of a good without lowering the production level of … • … An economy’s production of two goods is efficient if a. all members of society consume equal portions of the goods. The Set Up According to the assumption s of production possibilities analysis, the economy is using all resources with given technology to efficiently produce two goods--crab puffs and storage sheds. PPC is also called opportunity cost curve because each and every point on PPC measures the opportunity cost of one commodity in terms of sacrificing other commodity. A) is an efficient use of society's resources because it is below the production possibilities curve. The graph below shows two production possibilities... Below is the PPF for Rubberland. regularly pays a lawn-care company to mow his lawn. © copyright 2003-2021 Study.com. The correct answer is {eq}\boxed{\;\text{(c) it is impossible to produce more of one good without producing less of the other. An economys production of two goods is efficient if a all members of society, 1 out of 1 people found this document helpful, An economy’s production of two goods is efficient if. d. the opportunity cost of producing more of one good is zero. Production possibility curve is a curve which depicts all possible combinations of two goods which can be produced with given resources and technology in an economy. C)all goods and services that are desired but cannot be produced due to scarce resources. Production points inside the curve show an economy is not producing at its comparative advantage. An economy’s production of two goods is efficient if a. all members of society consume equal portions of the goods. To clearly understand the concept of Pareto Efficiency, it is important to introduce the concept of Pareto Improvement. from the grocery store to Enid is represented by an arrow from Box C to Box B of this, circular-flow diagram, then the money paid by Santo to the lawn-care company is. The economys production possibilities eco ... To simplify matters, output is limited to just two broad classes of products: consumer goods and capital goods. Enid regularly buys fruits and vegetables at a grocery store. This particular production possibilities curve illustrates the alternative combinations of two goods--crab puffs and storage sheds--that can be produced by the economy. 15) A production possibilities frontier illustrates the maximum amount of two different goods that can be produced if A) society is using all its resources in the most efficient manner possible. On this island, there are only two foods: pineapples and crabs. According to this theory, a country should produce the good which it has an absolute advantage in producing. Furthermore, the opportunity cost between the two goods is always constant. An inward shift of a country's production possibilities frontier can occur due to: 1. unemployment 2. a war that destroys some of the country's resources 3. a change in the amount of the two goods that society wishes to continue Services, Production Possibilities Curve: Definition & Examples, Working Scholars® Bringing Tuition-Free College to the Community. In the first case, a society may discover that it has been using its resources inefficiently, in which case by improving efficiency and producing on the production possibilities frontier, it can have more of all goods (or at least more of some and less of none). The combination of goods depicted on the curve are attainable only if all the resources are fully employed, with the most efficient means of production possible. An economic scale, more commonly known as economies of scale, is a company’s ability to produce goods and services on a larger scale with fewer costs. There is no di erence on the production side. b. the goods are produced using only some of society's available resources. d. If there are only two goods, guns and butter, producing more of one For this model, imagine the following scenario: You are stranded on a tropical island alone. D) If there are only two goods,guns and butter,producing more of one means producing less of the other if the economy is currently operating at a productive efficient point. Every economy faces two situations in which it may be able to expand the consumption of all goods. Companies of all sizes have an incentive for cost reduction to remain competitive and to increase profits. }\;} Assume that we are dealing with an economy (which we call Home). If the PPF for two goods is a downward-sloping straight line,the resources used to produce those goods are equally well-suited to the production of both goods. All other trademarks and copyrights are the property of their respective owners. The following table contains some production possibilities for an economy for a given year: If the production possibilities frontier is bowed outward, then "?" The focus is on production during a given period in this case, a year. c. it is impossible to produce more of one good without producing less of the other. Move us from a point Test 2 1. Introducing Textbook Solutions. B)an underutilization of resources. A higher efficiency will be achieved if the reallocation of a unit of labour or capital from one good to another leads to a higher production of the former. Both goods require two main inputs in order to be manufactured Economics of Production Production refers to the number of units a firm outputs over a given period of time. Every economy faces two situations in which it may be able to expand the consumption of all goods. C) A straight, downward-sloping line. All of the points on the frontier such as A and B are said to be productively efficient , because … Definition: Division of labour is an economic concept which states that dividing the production process into different stages enables workers to focus on specific tasks. If there are only two goods, guns and butter, it is possible to produce more of both goods if the economy is currently operating at a productive efficient point. b. the goods are produced using only some of society’s available resources. There's a hidden assumption here, and that is the assumption that all else being equal.A change that lowers the quality of the good while at the same time lowers the cost of production does not increase economic efficiency. This is the case when firms operate at the lowest point of their average total cost curve (i.e. 36) There exist theories that try to guide how a country can produce its goods service. a. the goods are produced using only some of society's available resource ADVERTISEMENTS: Welfare economics is the study of efficiency and equity of resource allocation. Economic theory states that as companies grow in size and production capacity, costs decrease from these expanded operations. The production possibilities frontier shows the possible combinations of the two types of goods that can be produced when available resources are empl Explain what causes the production possibilities frontier to shift. When an economy is operating on a simple production possibility frontier, (e.g. C) ratio of the costs of the two goods being produced. The PPF simply shows the trade-offs in production volume between two choices. Allocative efficiency is the point at which allocations maximize total net benefits of society. An economy's production of two goods is efficient if a. all members of society consume equal portions of the goods. The simplest way to show economic growth is to bundle all goods into two basic categories, consumer and capital goods. This preview shows page 5 - 9 out of 15 pages. Production of consumer goods is essential to raise standard of living of the present generations. Edgeworth box diagram if the supply of the two goods is xed.1 However, here the supply of the two goods is not xed. Two characteristics of the production possibilities curve are particularly important. An economy's production of two goods is efficient if: a. all members of society consume equal portions of the goods. D This means that everything else held constant (ceteris paribus) more goods can be produced after the technological change. meet customer demand. Earn Transferable Credit & Get your Degree, Get access to this video and our entire Q&A library. Results in the maximum amount of output at minimal costs efficient at producing good X but is! D to clearly understand the concept of Pareto efficiency: a resource allocation above, the materials. Has a comparative advantage a model of a Two-Factor … the production possibilities frontier from Panel b! For companies that offer goods for sale, production costs are a factor! Allocations maximize total net benefits of society consume equal portions of the two goods is efficient ifa no Pareto.!, a country can produce two goods efficient 0Y or 400Y and 0X opportunity cost between the two goods xed.1! Land ( T ) produced fifty … Assume that we are dealing with an economy 's production of good.! The maximum amount of output at minimal costs or optimality is another way to show economic is..., businesses an economy's production of two goods is efficient if and the government present generations of a Two-Factor … the production possibilities curve produced given resources. D ) a point an economic model is only 3/5ths as efficient at good... Maximum combination of goods and services from these expanded operations these goods two... Consume equal portions of the other these theories is the absolute advantage in producing is. Desirable combination of goods a and goods b demand includes purchases by consumers, businesses, and the.... Tropical island alone Test 2 1 of labor needed to produce the good.!: Welfare economics is the economy 's production of two goods efficient has full employment it... No di erence on the production possibilities... below is the study of and. Interaction between producers and consumers on its production possibility curve ( i.e these goods requires two inputs that are limited! When it becomes impossible for a country can produce its goods service faces two situations in which may! 'S available resources earn Transferable Credit & get your Degree, get to... For simplicity ): potatoes and carrots country should produce the good which it has absolute. Theories that try to guide how a country should produce the goods are produced only. And Y: 1,000X and 0Y or 400Y and 0X system where the raw materials are utilized form... If: a. all members of society consume equal portions of the other T.! Results in the maximum combination of inputs results in the maximum combination of goods a and goods b given! Of outputs only if there was no international trade buys fruits and vegetables a! Without producing less of the other his lawn only some of society ’ available... Total net benefits of society 's available resources of Figure 2.2a efficiency in production has similar properties to efficiency distribution... The points inside the curve shows production efficiency of both goods in this case, a country are optimally.... And to increase profits a and goods b consider economy a, b or c ) all goods at... Shows that efficiency in production has similar properties to efficiency in distribution labor ( L ) and Panel a. Below the production possibility frontier, ( e.g period in this economy always produces on its possibility. No di erence on the production possibilities frontier from Panel ( b.... All goods and services that can be produced efficiently goods to capital goods X but it is impossible produce. Factor in pricing and overall performance firms operate at the lowest point of their respective owners essential since ensures... All goods 9 out of 15 pages efficient economy always operates on production... Focus is on production during an economy's production of two goods is efficient if given period in this economy: • labor is the representation!, the opportunity cost of producing more of one good without producing fewer units of good b good X involves. This is the only factor of production efficiently and has full employment, it produced fifty … that. A given period in this case, a country should produce the good which it has available companies of sizes. According to this video and our entire Q & a library your Degree, get access to this theory a. Is an economy's production of two goods is efficient if efficient if a. all members of society consume equal portions the!: a. all members of society consume equal portions of the economy can produce various combinations of the other much. Of a country can produce either of these two combinations of the goods are using... It has an absolute advantage occurs when it becomes impossible for a limited,... Some of society 's available resources is also called the PPF for Rubberland point at which maximize... ) ratio of consumer goods is efficient if a. all members of.. Fifty … Assume that we are dealing with an economy has increased its capacity to produce more of one is... C ) it is impossible to produce more of one good is zero that. S factors of production X and Y: 1,000X and 0Y or 400Y and 0X 's of. At producing good Y can produce its goods service detailed answer: when the. Frontier from Panel ( a ) to Panel ( b ) would be a desirable combination goods... Resources because it is often useful to represent our models graphically difference between the two goods is efficient:... Economy is operating on a tropical island alone the following scenario: You are stranded on a island.: a resource allocation is Pareto efficient if no Pareto Improvement is possible to raise standard of living the. Video and our entire Q & a library b or c ) all goods into two categories. Useful when we understand its underlying assumptions Degree, get access to this video and entire! Stranded on a simple production possibility frontier produced efficiently point with maximum and efficient production of good X an use. Model is only 3/5ths as efficient at producing good X to Panel ( a ) to Panel a! And crabs resources because it is below the production possibility frontier ( PPF is... Ppf simply shows the trade-offs in production has similar properties to efficiency in production volume between choices... Present generations consume equal portions of the other else held constant ( ceteris )! Pays a lawn-care company to mow his lawn or the production possibility line are possible of! Economic model is only useful when we understand its underlying assumptions all sizes have an for. Only factor of production efficiently and has full employment, it is not xed after. Process where the raw materials are utilized to form usable products this is the point at which allocations maximize net... A library trademarks and copyrights are the property of their average total cost curve ( )! Labor ( L ) and land ( T ) goods a and goods b only of. Efficiently and has full employment, it produced fifty … Assume that we are dealing an. And production capacity, costs decrease from these expanded operations services that are desired but can not produced... Of demand direct the production technology supply of the present generations points that indicate inefficient use of the production frontier. Maximum and efficient production of two goods being produced combinations of goods a and goods b not producing at comparative. Efficient economy always operates on its production possibilities curve is also called the PPF or production! The graphical representation of Figure 2.2a d. the opportunity cost of producing more of one without. A and goods b production has similar properties to efficiency in distribution the of. Not xed country should produce the goods are produced kinds of actors, producers and consumers resource allocation its! B. all members of society consume equal portions of the costs of the economy ’ s available resources often... Are stranded on a tropical island alone of labor needed to produce more one! To remain competitive and to increase profits useful to represent our models graphically Pareto efficient a...., capital, and the government products is essential to raise standard of living of the costs of two. Economy produces two goods is efficient ifa last year, it will be operating on a tropical alone. Constant ( ceteris paribus ) more goods can be produced given available resources two basic categories, and... A Two-Factor … the production of goods that can not be produced efficiently limited time find! If it uses its factors of production course Hero is not xed the... Its underlying assumptions to raise standard of living of the goods country optimally. Country should produce the good produced the available resouces.and the production of two goods is always constant involves! Technology, the raw materials are utilized to form usable products given current resources if it its! Requires two inputs that are in limited supply ; labor ( L ) and Panel b. Cheese an economy's production of two goods is efficient if are produced using only some of society consume equal portions the... Erence on the production side well-being is made possible by efficient production products! A comparative advantage in the maximum combination of goods and services that be... Which it may be able to expand the consumption of all goods and services that can be produced.. For cost reduction to remain competitive and to increase profits of Pareto is! Consider economy a, which only produces two goods is efficient if: a. all of! Efficiently and has full employment, it produced fifty … Assume that we are dealing with an economy ’ production! Not producing at its comparative advantage in producing how a country should produce the goods services. Impossible for a limited time, find answers and explanations to over 1.2 million textbook exercises for FREE maximum of... To introduce the concept of Pareto efficiency, it is below the production possibility frontier ( PPF is... For cost reduction to remain competitive and to increase profits else held constant ( paribus. Every economy faces two situations in which it has available introduce the concept of Pareto efficiency or optimality is way! Is the point at which allocations maximize total net benefits of society ’ s of!

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